The Newsletter
The Transcript 06.15.20
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Succinct Summary: We are clearly in a recession with very low visibility on how we are going to come out of it. Companies are also seeing consumers move away from credit as they also shift away from discretionary spending. On the positive, there are some promising signs of recovery as shorter cycle businesses like auto come back.
Macro Outlook:
We’re clearly in a recession whose visibility is very foggy
“we’re clearly in a recession. We certainly feel that way.” – United Natural Foods (UNFI) CEO Steven L. Spinner
“typically, in all the recessions I’ve been through and now with so many decades in this industry, it’s been a lot. You could with us fairly good degree of accuracy and be able to kind of run the numbers all the way through what we thought ultimate loss rates would be, but there is a wide range of potential outcomes from this point forward.” – JPMorgan Chase (JPM) Consumer Bank CEO Gordon Smith
But there are some promising signs of recovery as the economy opens up
“t this point in time, the worst is more or less behind us. We are starting to see countries wanting to open up. We’re starting to see companies start taking baby steps. We’ve seen China actually now get aggressive in terms of the supply chain – the ports opening up and forcing other ports to open up as well” – Keshav Murugesh Group CEO Christine Ta
“we have clearly seen what I think at this point in time is the bottom of the volume decline and we have been inching up week after week after week, as we have moved through May and now into June. Clearly, the increases are slight, but the trend line is promising.” – CSX Corporation (CSX) CEO Jim Foote
“we’re still navigating that crisis, we are at the early stages of returning to offices, opening up these cities and states and to some extent testing the resiliency of a return” – Citigroup (C) CFO Mark Mason
as shorter cycle businesses pick up
“I think the first part the shorter cycle businesses are recovering pretty well. So as I said, those businesses seem to be coming back, autos are coming back, which means metals are coming back and thermal solutions are coming back. So, I think that part is good.” – Honeywell International (HON) CEO Dr. Rajeev Gautam
“We’re seeing the auto industry start to reopen, which is helpful, and health care services generally. I think the areas where we’re seeing still delayed recovery are areas like travel, hospitality, restaurants.” – KKR (KKR) Co-President Joseph Bae
“we’ve started to see really from the last week of May and first week of June, a real improvement. Now whether two weeks a trend, who knows? But, obviously, sales have been very weak for 8 or 10 weeks. People weren’t going out to car dealerships to where they were either open to buy cars. And in the last couple of weeks, we’ve seen sales on a year-over-year basis, up about 15%. So, I think I would mark that down as an encouraging early sign. And it’s true on the – on mortgage originations. In terms of purchase, just obviously heavily suppressed over the course of the last 8 to 10 weeks, starting to look like it’s coming back.” – JPMorgan Chase (JPM) Consumer Bank CEO Gordon Smith
But will this continue? Nobody knows
We’re beginning to see an opening up that looks really encouraging. Will that continue? Will there be a resurgence in COVID cases? And if there is, how meaningful will that be?” – JPMorgan Chase (JPM) Consumer Bank CEO Gordon Smith
” Nobody has a crystal ball in this environment. Nobody really can predict the shape of the recovery, how long it’s going to last, but this is going to be a gradual recovery. It’s not going to be a V-shaped snap back to the real economy.” – KKR (KKR) Co-President Joseph Bae
“we have no idea what the second quarter is going to look like, but it’s definitely going to be an unusual one” – American International Group (AIG) Deputy CFO Sabra Purtill
Demand for credit has shrunk drastically as consumers shift spending away from discretionary items
“the fact that debit is outperforming credit is not surprising. People tend to want to use the money they have in times like this versus money that they might be borrowing, plus we’ve seen the spend mix shift away from more discretionary items where credit is often used or preferred by consumers. And then you add in the fact that most of the government stimulus funds were deposited into checking accounts, where people use their debit card to spend those money. So you know debit continues to outperform credit by a fair bit, and not totally surprising” – Visa (V) President Ryan Ryan McInerney
“demand for borrowing in the credit card space is very low, very weak right now, which is exactly what you’d expect because it you know, it sits in parallel with consumer spending on credit cards. So, you know, people have pulled back and credit card is very low demand..Demand for credit in credit card shrinks dramatically in recessionary times” – JPMorgan Chase (JPM) Consumer Bank CEO Gordon Smith
The scale of disruption across industries symbolizes a supernova moment
“I must say that for me, this is a Supernova moment. This is a particular moment where overnight our business models have changed. Every business model has become a virtual model. In fact, as compared to what Tom Friedman said in 2007 when he defined Supernova, I think what we are undergoing is 2 times of the Supernova, because this is a pandemic that is happening at the same time across the world.”- Keshav Murugesh Group CEO Christine Ta
“we’re seeing play out is consumers that had not engaged in certain segments of the e-commerce, adopting e-commerce in those segments in significant ways. So if you look at the number of active cards using – making an e-commerce transaction versus before like in retail, grocery, drug stores, you know restaurants and QSRs, those are all up 30% versus pre-crisis levels.” – Visa (V) President Ryan Ryan McInerney
“there are in fact, some significant changes that I think we’ve all gone through, but certainly our consumer and corporate clients have been experiencing. I think the biggest and clearest takeaway or change that I’ve seen would have to be characterized as a very, very swift shift towards digitization.” – Citigroup (C) CFO Mark Mason
International:
Emerging markets are seeing a rising impact
“We have seen several emerging markets, particularly Russia and Brazil, with a rising case count, which we will watch very carefully. ” – Colgate-Palmolive (CL) CEO Noel Wallace
Financials:
Loan demand and debt issuance are moderating.
“we saw significant draw downs in the first quarter. In light of how the market evolved through the first quarter, we saw, I think it’s approximately $25 billion or so of draws. But the capital markets are wide open and receptive with significant debt issuance volumes that we’re seeing…We would expect that draws as well as new loan demands will continue to moderate, moderate further…we’re seeing those draws start to abate, but more importantly pay downs given liquidity in the market and new loan volumes abate as well. ” – Citigroup (C) CFO Mark Mason
Rise in card spending from the April lows
“We saw I think positive 30% year-over-year from late April you know onwards, while we’ve seen a continued e-commerce adoption. Card present spending was down 50% year-over-year in April and it exited May declining in the mid-20s. So we’re really starting to see as states in the U.S. start to reopen, more people are going out, they are using their Visa Cards and we’ve seen a reasonably large improvement in card present spending as well.” – Visa (V) President Ryan Ryan McInerney
“In the U.S. cards business, the overall spend started to pick up with May purchase sales down by roughly 20% year-over-year. So, it’s still down year-over-year, but better than the mid-thirties decline that we were seeing in the middle of April” – Citigroup (C) CFO Mark Mason
The search for yield continues
“So in this low yield environment, I think many investors, including institutional investors, are looking at higher yields, at higher cash returns and infrastructure is a perfect asset class for that.” – KKR (KKR) Co-President Joseph Bae
How is the insurance business doing?
“Obviously, for businesses that are closed, you’re not going to be paying workers’ compensation, insurance, and so we would see less premium from those sorts of policies, and also less losses. But in areas where you are seeing increased claims or activity, so whether it’s, say, in the health care worker space for workers’ comp, people are going to be pushing for rate to increase the premiums to cover the risks, particularly as you think about this virus being around for a while without a vaccine.” – American International Group (AIG) Deputy CFO Sabra Purtill
Consumer:
Pantry de-stocking in Europe is happening
“Pantry de-stocking has begun, notably in Europe..we’ve seen the destocking start certainly in some of our categories in the U.S. But the U.S. continues to be quite healthy. Europe, obviously, post the pantry load, we’ve seen a slowdown in Europe in terms of category performance.” – Colgate-Palmolive (CL) CEO Noel Wallace
Demand for animal-based protein still persistent
“So it bodes well when you look at animal numbers and profitability coming back because demand is there. Demand for animal-based protein continues to persist globally overall. So that demand is there. Supply has been hit by a couple of events overall.” – Elanco Animal Health (ELAN) CEO Jeff Simmons
“I think that you’ve seen COVID impact most two species, pork and beef. I think that’s where the focus is. Poultry has been pretty resilient” – Elanco Animal Health (ELAN) CEO Jeff Simmons
Merchants are rethinking physical world checkouts
“I think the other thing that we see is merchants coming to us and really asking about how do rethink physical world checkout. …I would say that checkout in store, in store and buying in general, has been going through an evolution regardless of COVID. I think COVID has just amplified it.” – PayPal (PYPL) Senior Vice President, Omni Payments Jim Magats
“The same trend we’re seeing in the consumer side, which is the shift from cash to electronic forms of payment, we’re starting to see also occur in terms of dialog we’re having in the B2B side” – Mastercard (MA) CFO Sachin Mehra
Meals at home will continue to be high because of covid 19 and the current recession
“We certainly believe that the amount of meals that are eaten at home versus away from home are going to continue in a pretty significant way. I think most people are still going to be reluctant to sit in a restaurant for an extended period of time. That’s part one. Part two is, COVID is not over. There are many states that have very high rates of infection. And as long as that continues, and we have every reason to believe it’s going to continue until there is a vaccine, there is going to be just pressure to continue to eat more meals at home…history has proven many times over that during a recession…people are much more careful about where they spend their dollars and that just means more meals at home versus away from home.” – United Natural Foods (UNFI) CEO Steven L. Spinner
There are some emerging trends
“I said, you see sort of emergence of health and beauty. I think everyone has probably gone through at least the idea of buying fitness equipment. You see food and beverage obviously becoming a mainstay of our merchant growth as now restaurants are now having to evolve themselves to more of a takeout environment.” – PayPal (PYPL) Senior Vice President, Omni Payments Jim Magats
Technology:
The shift to the cloud continues unabated with more CFOs discussing it
“In Q2, we saw historic highs in adobe.com traffic across both Creative Cloud and Document Cloud. Demand for our professional video products was particularly high with strong engagement for Adobe Premiere Pro and After Effects. We continue to see steady growth from social content creators using Premiere Rush, which saw a 75% increase in monthly active users quarter-over-quarter.” – Adobe (ADBE) CEO Shantanu Narayen
“”When I talked to other CFOs, say, three-plus years ago, there’s really a big question in their minds as to whether they would ever move financials to the cloud. They were worried about the risk; they were worried about confidential data being in the cloud; they were worried about not controlling their own servers and their own datacenters, and really putting that critical business system into the hands of somebody else was something that they weren’t sure that they would ever do. Now, the conversations that I have, have really shifted, and almost every single CFO that I talk to says that they absolutely are going to move financials to the cloud” – Workday (WDAY) CEO Robynne Sisco
There is also a high demand for digital documents
“The shift to remote work has driven a surge in demand for digital documents, with use of web-based PDF services, up nearly 40% quarter-over-quarter and the number of documents shared in Acrobat, increasing 50% year-over-year.” – Adobe (ADBE) CEO Shantanu Narayen
and a tidal wave of inertia in digital payments
“So, it’s almost like at one moment demonetization happened globally, as well as everybody got a PC and everybody got a mobile phone. And so, that’s just sort of describe that all simultaneous to physical stores being closed. And so, it is just an amazing sort of tidal wave of inertia right now in the digital payment space.” – PayPal (PYPL) Senior Vice President, Omni Payments Jim Magats
Industrials:
Nobody knows when travel is going to come back
“We don’t know when travel is going to come back; I mean that’s the bottom line. I think it’s logical to assume that consumer regional travel will be the first to come back, then we’ll see longer haul consumer travel, then business travel and that’s my sense of how things will come back, but you know we don’t know. And the bottom line is we’re going to need some advances in terms of testing, therapeutics and ultimately a vaccine before I think we see things get back to pre-crisis levels, so it’s going to take time. I think it’s likely some business travel might not come back at all, but we don’t know.” – Visa (V) President Ryan Ryan McInerney
People are rethinking transportation modes with several turning to bicycles
“What’s happening out there in cities across the world, whether it’s Paris, it’s New York, it’s Berlin, one of the thoughts is that, hey, wow, traffic has gone down, it’s a lot easier to move around the cities. The air quality is better. So, there’s this thought out there – we should rebuild better, coming out of coronavirus. Wouldn’t it be great to have more livable cities? So, what we see in cities around the world is that people are turning to bicycles for transportation” – Tern Bicycles Team Captain Joshua Hon
As such, demand for bicycles is high and the supply chain is constrained
“bike companies don’t typically hold a lot of inventory….If we could ship faster, our customers want them. But the bike industry has a pretty long supply chain, so you can’t make sudden shifts too quickly.” – Tern Bicycles Team Captain Joshua Hon
Supply chains have been impacted by coronavirus + Trump Duties
“Supply chain has been an issue. We have all sorts of disruptions. So, you have Trump duties which has caused a very large shift in manufacturing from China to other Southeast Asian countries. You have the coronavirus. Most of the parts that we use – and there are many – are coming out of China. If you’re missing one part out of 30, you can’t make your bike. So, it has been challenging” – Tern Bicycles Team Captain Joshua Hon
Mask raw materials are available but at increased prices
“People thought that they could make masks, they found out when they tried to ship them into various places around the world that they didn’t have the quality required. So some of that demand, well, that demand has begun to dissipate. We’re seeing the impact of that on raw material supply. Raw materials are still available though at increased pricing, but availability has become a little bit more healthy.” – Lakeland Industries (LAKE) CEO Charles Roberson
Healthcare:
Covid19 led to reduced non-critical surgeries
“number of procedures that the Stellaris Elite were running, had dropped over like 90%. in early May, we start to see some recovery, so much so that as we approach the end of May, we’re now back to about 85% recovery ” – Bausch Health Companies (BHC) CEO Joe Papa
“First, as access to clinics and hospitals has become constrained with COVID, we have seen an impact on patient volume, especially new patients’ scripts” – Bristol-Myers Squibb (BMY) EVP Chris Boerner
But demand is coming back
“So there certainly were some patients that were not able to get sensors on their – on their 90-day expiration, but we are – see them starting to come back.” – Senseonics Holdings (SENS) CEO Tim Goodnow
” there are a subset of industries and portfolio companies around the world where we’re seeing reopening and signs of life and recovery that are very promising. Some of those businesses are non-elective health care companies like dental, veterinary, certainly light manufacturing in China” – KKR (KKR) Co-President Joseph Bae
